Watchdog's ruling lifts lid on hedge funds' positions

Discussion in 'Wall St. News' started by Sbelmont, Jun 25, 2008.


    Watchdog's ruling lifts lid on hedge funds' positions

    By Jennifer Hughes

    Published: June 24 2008 03:00 | Last updated: June 24 2008 03:00

    Ten days ago, rattled by a spate of suspicious short-selling of weak bank stocks, the Financial Services Authority signalled it would begin a new regime requiring investors to disclose short positions if their target were in the midst of a rights issue.

    The rule change has triggered outrage among the hedge funds - the biggest single group of short-sellers - but has won approval from institutional investors and investment banks, which underwrite rights issues. Who is doing what? The FSA obliges short-sellers to reveal their net short position if it is worth more than 0.25 per cent of a company's market capitalisation and that company is raising capital through a rights issue. Yesterday was the first day disclosures became mandatory, throwing up some of the biggest hedge fund names. Harbinger and GLG emerged as having taken the biggest short positions in HBOS and Bradford & Bingley respectively. What is short-selling? Selling short is the practice of borrowing stock from investors and selling it in the expectation that the price will have fallen by the time it needs to be returned to the lender. The short seller pockets the difference, minus a fee to the lender. Mainstream fund managers also often hedge their holdings by also taking out a short to protect against the risk of a price fall. Why is this important? The rule change was unexpected, particularly for a regulator that has always supported the principle of short- selling. The FSA has made it clear it regards these as special circumstances, but the move has highlighted the ongoing debate about the merits of the practice and how it could, or should, be monitored and regulated. What prompted the rule? The FSA became concerned that market abuse was rife among company rights issues. HBOS, Britain's biggest mortgage lender, which is looking to raise £4bn, equivalent to almost two fifths of its market capitalisation, appeared to have been aggressively shorted....